In my short-term trades list in the Wall Street Examiner Pro Trader market update,there are now more shorts than longs, and the shorts turned more profitable than the longs in the last week. Those are signs of a market in intermediate transition.

And that at least partly validates the short-term LAMPP red signal. The market averages have been rising on an ever narrowing list of participating stocks. The averages are masking spreading technical weakness in an increasing number of stocks. Air pockets have developed in many names as they report worse than expected earnings. You may have seen this in your own portfolio over the last two weeks. The market averages rarely tell the whole story, and sometimes, like now, they tell a misleading story.

In the next week or couple of weeks, the LAMPP will cross below its 78-week moving average. That will be a red signal. It will be time to get out of stocks. Tops take months to roll over, so there's probably no urgency to "sell everything," but we should stay on a systematic program of regular sales to build a substantial cash holding by March 2018. I'm looking at 60% to 70% of a portfolio in cash. Your goal would differ depending on your personal needs. As an older person, I might want to hold an even higher percentage of cash.

I also think that it's probably OK to start shorting the market now by shorting the SPDR S&P 500 ETF Trust (NYSE Arca: SPY) or buying inverse exchange-traded funds (ETFs). I would not use leveraged ETFs or puts unless you are an experienced technical trader or are comfortable with a third-party timing service such as the Wall Street Examiner Pro Trader.

The long-term LAMPP has weakened in the past several weeks because Treasury supply is increasing, just as I had forecast…

Here's How the November "Treasury Flood" Will Drown the Stock Market

It's not rocket science. The TBAC (Treasury Borrowing Advisory Committee) had told us in its quarterly report to the Treasury that supply would begin to increase in the second half of October, and will increase even more radically in November and December.

Why is this bearish? Because dealers and investors who buy those Treasuries must pay for them, obviously. And the Fed is no longer buying, and is in fact redeeming some of its holdings. Under QE, the Fed bought enough paper to fund every dime of the following week's Treasury issuance. Now it's funding virtually nothing and it has even begun withdrawing cash from the system. It will do that in increasing amounts over the next 12 months.

That means that dealers and investors must absorb massive increases in Treasury supply over the next two months with no funding whatsoever for the Fed. That will require at least some liquidation of other paper at the margin. Buyers of the Treasury paper will almost certainly liquidate at least a small measure of other holdings, whether bonds, stocks, or both, to raise the cash to pay for the new Treasury paper they are buying. It will put downward pressure on bond prices, and therefore yields will rise.

At the same time, it will start to put downward pressure on stocks as some players opt to sell stocks to buy the Treasuries.

As the Fed drains more and more cash out of the banking system, going from $10 billion per month now to $50 billion a month in October 2018, the supply/demand balance will only grow more bearish.

There's one vast worldwide pool of money available for purchasing financial assets, aka "investments." Buyers can choose to purchase bonds, stocks, or a variety of other assets. Stocks and bonds are of course preeminent. Their markets are unimaginably immense. But only a tiny percentage of that is traded, and some of it is traded repeatedly and constantly. Prices come from those marginal trades. Those prices at the margin are then applied to value every single financial asset in every portfolio in the world.

But think about it. What would happen if everyone wanted to sell? They would be unable to. There would be no market. So in that sense, stock and bond portfolio values are completely imaginary. Even a tiny shift in demand for financial assets could massively affect these imaginary values. The markets create only the illusion of wealth. If a few more dealers or investors need to liquidate something, then suddenly all portfolios are worth less.

Here's where macro demand analysis comes in. If we see signs that there's even a subtle shift in demand for Treasuries, that could influence not just bond prices, but also stock prices.

By submitting your email address you will receive a free subscription to Money Morning and receive Money Morning Profit Alerts. You will also receive occasional special offers from Money Map Press and our affiliates. You can unsubscribe at anytime and we encourage you to read more about our privacy policy.

You can view our VQScore top-rated stocks now by entering your email below:

By submitting your email address you will receive a free subscription to VQScore and occasional special offers from Money Map Press and our affiliates. You can unsubscribe at anytime and we encourage you to read more about our privacy policy.

Today's Markets

DJIA336.25(1.38%)24,706.35

NASDAQ72.77(1.03%)7,157.23

S&P34.75(1.32%)2,670.71

ABOUT MONEY MORNING

Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.

By submitting your email address you will receive a free subscription to Money Morning and receive Money Morning Profit Alerts. You will also receive occasional special offers from Money Map Press and our affiliates. You can unsubscribe at anytime and we encourage you to read more about our privacy policy.